Scarcity of risk-free assets moves monies to the U.S.

The Reserve Status of the U.S. Dollar

As long as the overall deleveraging process continues, the relative scarcity of risk-free assets will increase. This suggests the dollar will rise further.

How much further is unknown, but the key event in an eventual dollar reversal will be either a complete recapitalization of the European banking system or additional stimulus in a concerted U.S./EU effort designed to stave off the day of reckoning.

It won’t work, but the illusion will hold for a while longer.

Speaking of illusions, if there is ever an argument as to why the USD will eventually lose its reserve status, this is it.

The gradual decomposition of quality assets all but guarantees that the few remaining viable currencies with risk-free status will have to band together in a last-ditch effort to maintain global liquidity.

My best guess at this point is that the basket of assets will eventually consist of a blend of currencies and hard assets.

I see that including the USD, the Japanese yen, Swiss francs, a neutered euro and Chinese yuan blended with gold and some form of oil-related instrument.

But there’s no question about it. Absent complete financial reform, each is badly flawed in one way or another — including the U.S. dollar.